Every US VC is running after India. The entrepreneurs are not mature, deals are mostly not fundable. Seed stage “mentor-capital”, essential at this stage of the game to build a pipeline of startup companies, is largely absent from the scene.

As Subrata Mitra and Prashanth Prakash of Erasmic explained to me this week in a phone call from Bangalore, most experienced technology managers in India today make too much money and lead too cushy lives to want to be entrepreneurs. A mid-thirties middle manager with 10 years experience is easily making $100K. Why would they bother with a startup where the total startup capital, at best, is $50,000?

As a result, those who are becoming entrepreneurs are younger folks in their mid-twenties, 2-3 years of experience, with not much to lose.

Remember the mid-nineties? Entrepreneurs in Silicon Valley were mostly 23-30 years old. My generation. I was 24 when I started my first venture, 27 when I started my second, and 29 during my third. Marc Andreesen was 23 when he started Netscape.

The two Erasmic guys have looked at about 80-90 deals in the last 12 months. Not absolute zero-stage deals, but those with a little bit of validation, those that have already been set up with $10-$20k of friends & family money. Of these, 20 qualified as worthy of further investigation, with only a couple being fundable.

Erasmic claims to be the first of its breed of “mentor-capitalists” in India, with a small $10 5 Million fund, that is focused on moving ventures to the next level with extreme hands-on involvement. Their team has experience running full-scale India operations, as well as of founding and exiting companies in the US and in India. They bring substantial contacts to the table, both in the venture community and on the field, in India.

They are a good example to follow, if you are an Indian in tech, with substantial experience with startups and venture in the valley (or elsewhere), and are looking for your next career step. Raise a small fund, move to India, and leverage your skills over a portfolio of seed-stage deals.

That’s what Ashish Gupta is about to do. Move to India. His new $100 Million fund, HelionVC, is to focus on early-stage deals in India (probably not seed-stage, because $100M is too large a fund to do seed-stage in India).

In my opinion, the bigger hole in the market is seed funds for India, and a $25 Million fund would be perfect to play that market, say with 3 partners.

But, you HAVE to be IN India. Not sitting in the valley. In fact, you may even pick a region to focus on. The Erasmic guys only work with Bangalore companies. They don’t believe it is possible to provide the same level of hands-on expertise in multiple cities, without spreading themselves thin.

And for those VCs who are looking for slightly later stage investments in India – you better facilitate the setting up of some of these $25 M funds now, or else you will have no pipeline to draw from in the next 5 years, as the competition for deals continue to be brutal.

Hi Sramana,
The interesting part about all these funds/VCs/Angels setting up shop is the Web-2.0 phenomenon.
It is what I call a “mashup” phenomenon
I have yet to see any VC’s funding a tech enterprise like EDA, design house (Ittiam, etc.)

There have been EDA / Design Services fundings, but they all originated in the valley. You have to be close to the customer to know the open problems, to start something credible.

Look at Atrenta (RTL Predictive Analysis) & Open Silicon (Design Services). Both are led by very experienced entrepreneurs. Ajoy Bose of Atrenta was my partner in Intarka, and had also done Duet and Interra before. Naveed Sherwani, CEO of Open Silicon, is a former Intel guy, and Pierre Lamond and Promod Haque are involved in this deal.

Good opportunity bait and warning. Kind of carrot and stick for the VCs Heh?

One of the probems is due to lack of institutional framework for startups to thrive. The engg schools are either too busy with the degree program or too busy palying truf wars or both. Startups dont want to get caught up in that.

Thus it takes a lot of time to get an idea to prototype stage. Inn the process, founders learn bitter lessons in life and also develope aversion towards costly capital.

Reducing the cycle time to success( or failure) will be another carrot and stick theme. Perhaps you can illustrate it in another post in detail.

Please elaborate. You guys are on the field. If you want issues to be addressed, you have to give voice to it. I am trying to facilitate, but since these are not exactly my issues, and I don’t have direct experience with them, I cannot unearth them without your help and pointers.

And ask your fellow entrepreneurs to also contribute their points of view.

Great Post ! Very informative .
problme with VCs here is that most of them are only willing to invest in service companies they don’t trust indian with developing a great product and there believe is not without ground there is some grain of truth in this widespread preception .

Mentore Capital require VCs who are one time enterpreuer them self to identify the potential not some investment bankers to manage fund . but the sad part is that this type of funds is open only to indian returning to india from a stint abroad . what is the chance of getting funding for a Droput with no exp and a good idea ? very little i guess or zero .

i think location based fund paradigm is not a good way to do it youshould fund a company which is solving a location based vertical . a Carpool site for India no matter whether it is in delhi or Bangalore .

start up are born with constraint and location is one of them VC should be more flexible on it .

It is interesting to know that the VCs are running after India though I am not sure why they are doing so. Better which is more reasonable to them appears to me is to make sure as a part of funding a company anywhere in the world they insist that the company they are funding must have a strategy of leveraging India. Which is a proven model and India has already matured to work as a global team oneshore team instead of just an offshore team. A banker can certainly and effectively help building the India operation for such a funded company.

SantanuTuesday, July 4, 2006 at 1:47 PM PT

Santanu,

There is a few hundred million Indian middle class consumer population that is very attractive as a market. Especially, as this population becomes “connected”. Large emerging markets are always where VCs rush to.

The India operation has become mainstream and standard fare for US companies. All VCs ask entrepreneurs for offshore strategies (India, China, Eastern Europe – some leveragable cost structure). These days, most VCs don’t fund unless there is a convincing offshore strategy.

Remember when we did Intarka in 1998? VCs would not fund us because we were doing product development in India. It made them “nervous”. It was too “risky”. I kept trying to explain that there was no other way to access a development operation of 30 people for $25k/month …

Anyway, you know the rest of that story. NEA did fund us. But that funding round literally drove me crazy, and I had to accept all sorts of terms which today I would not accept. Hindsight 20:20.

Sramana,
Ideally, each and every activity of startup must be as easy as getting a photocopy done(of course without owning a copier!).
Every small town bazzar has at least one ‘XEROX’ shop – hence the metaphor.

But the reality, is more like you have to assemble the copier, produce the paper, toner and get your copy done.

I had to literally go through 8 iterations of getting it done by a local fabricator. I started off with what he is already familiar with and added one feature at a time to get to what I wanted. This is mainly because he did not take CAD drawings for input!

Since I am a low volume, ‘special request’ guy I had to put up with any delays. The alternative is to build similar working reltionship with another such fabricator.

University/Engg schools mediated rapid prototyping facility would have made it as simple as getting your photocopying done. Such facilities are just now emerging. These facilities will have to shed their sycophantic baggages for them to be really attractive for regular startups.

Now, this kind of cascading delays shakes up the very foundation of entrepreneurship. First freedom to fail is reduced. Second, because significant time/life is invested by the founders, the return expectations goes up. Calling it quits becomes a difficult decision. All in combination reduces the chances of success. Vicious trap.

Thus if you want good deals in the pipeline, facilitate reduction of cycle time of every startup activity. Start off with core activity of startups- prototyping. Not just engineering prototyping, market prototyping as well.

Good points. Just curious … is there a difference in manufacturing in China vs manufacturing in India in your kind of business? The Chinese are way ahead in dealing with Western manufacturing methods, and are well-equipped with CAD tools, etc. I have never viewed manufacturing as India’s advantage …

Guys,
The whole thesis is that sometime next year (2007), there will be $1-2B chasing startups in India.

If that’s the case, there’s no reason to believe that ALL this money will go to ONLY services companies (esp assuming products are generally so capital efficient). Of course, fundable product companies will have to stand the scrutiny (team, market, business model, etc.) that the sames VCs subject companies in other parts of the world. I.e., they will continue to fund teams & businesses in sectors where they think they can get a HUGE return.

The first reaction for larger funds would be to find later stage deals in which lot of the risks have been removed & more capital can be put to work effectively with lesser management costs. However, there aren’t so many of those either; so, earlier stage companies will get more VC bandwidth, and/or money will go to non-tech sectors.

The eco-system questions (Balaji) will take much longer to get addressed; however, that may not be such a big issue for a handful of interesting businesses to emerge.

Finally, given that most of the VCs are new to these markets, understand that they would be learning & experimenting too… so, use due caution in signing up a funding partner (do your side of the due-diligence also).

Subrata,
This $1-2B phemenon will shape the ecosystem, give direction to the dynamics. Little bit more coverage on the ecosystem issues will do the magic. How the ecosystem responds and shapes up is going to be the most interesting aspect of this phemenon.

Sramana,
In my kind of business – Innovation – manufacturing prowess( or the lack of it) does not matter. I want my prototypes built. Here, now and fast: Charge a premium fee and ask no questions. Just like photocopying.

I am a working lady with Managerial background and my Product is a
gazette, which is economical, effective, genuine ‘Fitness Product’ and is a need of
society. This product was initially devised through my idea and
imagination for self-use with the motive of fat reduction. The result of which was
surprising to me as within very short span of time I lost nearly Five KGs
from my tummy, thigh, butt, stomach and hands. The impact of it was so
great that I lost in kilos and inches too.
After getting this quick and unexpected result I decided to get its
patent.
The product is a revolution and unique self-tested product. Its manufacturing will be first in the world. The product has tremendous market value and if advertise properly will rule the market.
This is a user-friendly product can be used by anybody, anytime, anywhere.
It also can be used in house as well as at the place of work, it takes
less space, its using is enjoyable, can use in sitting, standing and sleeping
position as well. It simultaneously gives exercise to whole body with 100%
result.
It is so light and portable that you can carry it to your holidays, where
chances of your gaining weight are more. You can use it in house and at
your place of work also, easily anytime anywhere. We are also making it in
Thermoplastic, which will make it durable, light, portable and affordable
to everybody who wishes to reduce without any gimmick.
After these results I realised that this is a need of society and I must
go ahead for making it on commercial basis.
Now my moulds are complete and ready for mass production. If I get venture
capital at this stage I will be able to utilize it for Clinical trials,
working capital and Launching / marketing this unique patented product in
professional manner and turn this into well-known Brand name. If marketed
professionally this patented, innovative, affordable health fitness machine,
which gives cardiac exercise and benefits persons of all ages and in all
walks of life, will become a necessity of every home. Health and fitness is
an integral part of a healthy society most of the diseases today are related
to obesity generated from sedentary life style and erratic eating habits.
Every year millions of individuals succumb to diseases that could be
prevented by basic, low-cost measures.
I am interested in carrying out clinical trials before going to the public
to give authenticity to the product. Since the product is genuine the result
of clinical trials will have faith of clients in the product. Before going
into this venture I discussed the reason behind the weight loss with my
husband who is a Doctor and consulted a well-known physician also on the
same. Both of them explained me that it is working on the proven principal
of exercise makes you reduce, whether you are doing or the machine is
working on you, your body is getting the exercise. The machine is stripping
away body fat while retaining and building maximum muscle mass to increase
metabolism, with the result you actually continue to loose weight even if
you don’t use it for some time in between. Your metabolism keeps on burning
calories and even if you go back to regular eating, your body will still
continue to burn fat. Your own natural metabolism is FAR more powerful for
burning fat than any weight-loss diets. With most weight-loss diets you
loose water and muscle because of which when you stop dieting, you start
regaining weight. Moreover you do not loose weight proportionally, which has
a telling effect especially on the face, which begins to look old, sick and
haggard. Just the opposite happens with exercise, which makes it possible
for you to gain muscle while losing fat to provide energy for building
muscle. You even experience gain in strength and stamina despite
weight-loss. It allows you to get leaner, more muscular, stronger radiant
looking and healthy from within. Your efforts are not involved which makes
it enjoyable and relaxing.
I have carried out Patent search before filing the Patent application and
found out that there is no such machine made in the whole world. I have
filed application for Indian Patent in the month of February 2005 and PCT in
the month of September 2005 which gives me exclusive rights in total 110
countries covered by PCT. Its manufacturing will be first in the world. The
product has tremendous market value and if advertise properly will rule the
market. If I get venture capital now we can plan the result of clinical
trials with launching of the product simultaneously. I have already
registered a trademark which can be develop as a Brand. Even though we had
to use up all our savings, take loans and go through a lot of hardship, as
the developing process was consuming time and money, we were firm on giving
a quality product to the society for which we did not compromise on the
quality even of the smallest of parts. We substantiated it by offering
one-year warranty on the product. We started rigorous trials as and when the
parts of machine were ready. When the trials were going on, many times we
had to change the design / material of certain parts, as they were not able
to sustain the pressure building on it while rotating and were breaking
away. It was finalized only after many trials and we were fully satisfied
with it’s functioning.
National Innovation has also included my name in their 5th Biennial
Competition in Professional Ladies category.
The venture capitalist will be greatly benefited at this moment as all the
basic work is complete and product is ready for commercialization. The
returns will be quick and mind-boggling. I am interested in its
commercialization in mutual beneficial terms and conditions in case you are
interested in the same.

[…] In India Telecom + Venture News Written By Vishesh KumarLast November, at IBF’s Investing in India conference, Vinod Khosla noted that India tends to be ten years behind China. “So if you missed the boat on China, you don’t want to miss the boat on India,” said Khosla. You could feel the anxiousness in the room. Since then, VCs have kept a close eye on India, leading to reports of an all too familiar scenario. Too much money chasing too few deals, and a dearth of very early stage funding. […]

Hi all,
i was reading through the postings out here, i see many posts mentioning about the large inflow of Venture Capital into India. I was wondering where i could look up for seed money. I see that the big players like Intel Capital, look out for facilitating/expanding businesses and not start-ups which need seed money and guidance. Where do i go ? If anyone has any idea’s on that , please write to me at amithmit@yahoo.com, i would be thankfull for any leads.

best,
Amith

Amith NambiarWednesday, July 26, 2006 at 4:47 AM PT

Hi Sramana,

I agree with you , one has to be in India to get the real picture .
Many of the folks sitting in valley and elsewhere make mistakes about India and just generally chit-chat about India.

There is a talk of too much of deal flow happening but I have beeen tracking activities for quite some time now but i have not seen interesting deals happening.

One thing I must admit that though is that there is a great deal of perception(call it hype if you will) that is building up. A smart chap that I know once told me that perception should always lead reality. Hopefully pretty soon the reality would live up to the perception.

All seed funds are hogwash. VCs are looking for entrepreneurs with minimum of 10-15 years of experience in the field of their start ups. Normally it is impossible. And they expect that they should have atleast 2-5 customers in their hands. If they have everything why they should approach a VC. VC is a guy who should have the ability to foresee the trends and invest in the business. If VC wants to have cushion in every investment any Tom, Dick and harry could easily become a VCafter an IIM finance specialization or any B-school MBA for that matter. They must accept this. I spoke with few VCs who’re looking for people who’re having years of experience. people who’re starting their ventures could be below 30. How it is possible for these folks to have years of experience in their business. VC logic doesn’t make sense. I personally don’t believe in this VC issue

Guruprasad VTuesday, August 8, 2006 at 1:44 AM PT

Who are these people that are making US $ 100k+ in managerial jobs? What are some of the companies in India that offer that kind of pay? How does one get such jobs? Here we are slogging in the US and would love to go back to India if the pay there is comparable.

VRThursday, August 10, 2006 at 8:27 PM PT

This is much ado about nothing. Business is about common sense. The guy down the street who sells vegetables is doing a business. The big question is whether Indian entrepreneurs come up with blockbuster hits like Skype, Google or YouTube. IMO the answer is no for the following reasons

Indians dont like failure.

Indians want to work for brand name companies

Indians want security

Indians want to get married by a certain age and then have kids..

Hence the avg Indian cannot take risk and hence will not be build a high risk/reward startup from the grounds up.

The Indian/Desi VC’s from the west who are setting up shop in India dont have any personal risk involved. They have “made it” and therefore should be looked upon as the Indian businessmen like the Tata’s, Birla’s etc.

As a quiz

Name one Indian VC who has made it in the India rather than using the west as a lever ?

Wouldn’t it be great if someone could give you a “to do” list when you were ready to start your company that would guarantee your success? Even better, what about a “to don’t” list of things to avoid at all costs? Through experience, I’ve found there are no shortcuts to launching a business–you have to do your homework to understand your customers, competitors, market conditions and risks. But there are some principles I’ve found to be very effective for growing both my company and my clients’ businesses whether they are startups or Fortune 500 corporations, whether they sell consumer products, professional services or technology products. What to do as a start-up?

[…] Serious capital is chasing India, China, BioTech and CleanTech. Each has its own issues. I recently wrote a series of articles on the Indian Venture Capital situation, lack of expertise in seed investing causing a bottleneck in the pipeline (Venture Capital in India, Too Much Money, Too Few Deals). […]

Some problems that I have noticed with the environment for entrepreneurs in India:

Why is 50k an acceptable seed amount, as opposed to 250k in the US? Changing the mindset to have a larger seed amount may possibly help shake some of the guys in their comfy jobs out of their comfort zone. Getting a 30-40k salary makes it easier to quit your job than if you have to make nothing!

As rajAT points out, the VCs are happy investing in more traditional, non tech companies, just because they’re growing like gangbusters. Internet companies have a much higher risk factor associated with them – especially if you’re planning to go after the Indian market.

There are enough people in many educational institutions – not just the best ones – who are very motivated to start their own company. However, there is very little support – the schools themselves are largely clueless on how to do this, there’s a lack of mentors, lack of knowledge on too many things (physical space, right type of funding, access to money, etc.)

Physical infrastructure is tough to find. I’m breaking my head trying to find a decent small sized office close to home in Bangalore.

This is hearsay – VCs are largely from a Finance background, and are not entrepreneurs – so concentrate too much on risks rather than look at opportunities, when evaluating companies.

The bright spot is that I see many young people – the ones mentioned who have nothing to lose – are going for it. Even here, the big gap is lack of more seasoned entrepreneurs who can help them at the right time.

Sounds like you want to have the cake and eat it too.
At $250k seed money, startups in the US are not paying full salaries to any of their employees.

But at $250k seed money in India that you are proposing, with people making 30-40k in salaries
– those being pretty much full salaries for Indian standards – I think, you are trying to eat the cake and have it too.

Sramana, 30-40k is a full salary for a mid level programmer/product manager – not someone senior (8+ years). Also, options in India don’t have as much of allure as in the US – so, you can save on that part a little while hiring.

All I’m saying is – 200-250k opens up a lot of possibilities which a smaller amount doesn’t . Ultimately, lack of people is a big blocker (it is, believe me, that much more difficult to get someone to come work for no salary). Why not look at the bigger picture rather than quibble over, what, in the end, will be pennies? My personal belief is that in such cases, investors are optimizing for the short term, while losing out on the long term.

Sramana – absolutely, you need doers. For a mid or junior level programmer, money is more important than stock. For a senior programmer, too, money is quite important. I was referring to senior “doers”, not managers…

Taking a step back – your article was about why there are so few new ventures – esp. technology ventures – out of India. My comments are my opinions on some of the problems as I’ve seen them, and possible solutions. As a first time entrepreneur, I feel frustrated about what I feel are relatively easy-to-fix problems not being addressed.

It is good to hear that decent amounts of capital will soon be available in India for entrepreneurs.
Frankly we need more angel funding now in India. We need people who can invest about 50 lakhs or less based on the idea and the enthusiasm of the team. A startup incubating at our centre says seedfunds and angels in India behave like VCs. they dont seem to dare take calls on ideas.

If people with money are willing to unlearn their valley lessons and learn new ways of funding innovations, certainly many young techies like to become entrepreneurs.

Interesting comments… well… even I’ve been wondering about the dearth of real start-ups in India.

Many startup ideas I see and hear from friends are in reality “providing a service” not a truly innovative product. There are a few good products but in the minority.

For innovative products, there needs to be technical expertise. I believe this is irrespective of age/ exp, anyone can have a good idea. But, in the Indian context how many students can actually conceptualize a cool technical product (across disciplines not only s/w). Indian system educational and otherwise does not seem conducive. In the US, the fresh grads are the ones with the coolest ideas. Don’t see it at all in India.

As Indian engg schools don’t teach you practical stuff most students expect industry to train them and here there is a mismatch. Start-ups require doers and since most ppl fall in the “training required” group start-ups have already lost out on a large pool of candidates. Small cos should instead pick up students who are reasonably smart and train and use them.

Most Indian students get out of good schools and join big firms where you don’t learn a lot primarily bcos of secure money. In this context, start-ups should offer freshers good payoff say 3-4 yrs down the line (in lieu of good salaries NOW) in case the venture takes off. Currently, the seniors take all the spoils and so the new guy sees no long term incentive.

Regarding the VCs doling out money, I agree with somebody who pointed out that they are looking for cos who have 100% chance of success. They are non-Indians who want to make a kill and take off. They don’t give a damn about the business actually succeeding. Which is why my firm belief is unless Indians who actually have an emotional and financial stake participate such ventures are all doomed to failure.

HarishSunday, January 20, 2008 at 6:26 AM PT

Are VC’s willing to invest 10-15lacs in an idea for a small amt. of equity ?? Seed stage funding in india i think does not require more than that. If you can scale up to a sizeable size using that much money, i think startups have a good base to work on. Also, the main point that crops up here is, how much of the company do we give away for 15lacs ??? 20% ?? or 5% ?? How do you measure yourself against the VC who is probably thinking in $$ and valuating you in rupees !??

Tell Subrata and Prakash to also talk about honesty and integrity as part of their deal making. Do they think that Mistry’s of Virident can fool potential entrepreneurs all the time ?

Truth HurtsTuesday, March 4, 2008 at 12:13 AM PT

In my opinions the state of affairs especially in the tech space and with VCs globally thinking India and China as exotic places rather than place of real business. There is far to much money with the VCs but hardly they haev been able to make much of a impact in the tech space.
The issue facing for the dispartiy in cash versus deal flow is of innovation infrastrucuture in Indian universities are not condusive – as most fo them are teaching based and not research based.
Also no VC (barring 2/3) work hands on with inventors or idea generators – one need not be an experienced entrepreneur to do start ups. This aspect is lost out in Indian VCs.
Look at how US developed its model of innovation and then commercilisation – they got the infrastructure first and then rolled it out with inventors and slowly nurtured them into beign entrepreneurs or even for that fact serial entrepreneurs.

AshwinThursday, March 6, 2008 at 7:40 AM PT

Continuing – there is a void in Indian talent base for people with technology commercilisation expertise. This needs to be looked into for the likes of IIMs to deveop a course to address this global need in general but more specifically for india.
I agree with some of the posts which say that there is no stomach for people with 4+yrs experience to work with start ups – this is true because Indian job scene has seen high rate of attrition and also increase in salary has been very steep every year. This again puts into question the risk adn reward strategy on one side and on the otherside, Indians would react and think lateral only if they are forced to do so – else i am sorry we shall be faced with very very few enterpreneurial attitude amongst Indians

AshwinThursday, March 6, 2008 at 7:49 AM PT

[…] Sramana Mitra puts it in Too Much Money, Too Few Deals, â€œthere is excess capital chasing Indian start-ups and lack of fundable deals.â€ Interesting, […]

Hi.I think the salary quoted here for a senior management resource is highly inflated.$100 K would be around 50 lakhs INR? and that is definitely not what is earned by a almost 40,15 year plus person,in a software solutions delivery setup even in top 5 delivery organization.I should know because I am working in one.The simple reason why people don’t want to do startups – the risk is too great.We know what happened in the Dot Com bust.Who wants to risk that? That too when you can earn around INR 25 lakhs per year in a middle management position ,travel to US/UK/SE Asia on short assignments and save some more money in dollars or pounds? I contemplated immigration to Canada around 2000 for the promised riches in a foreign land.Now if anybody offers me money to do the same, even then I wouldn’t want to shift.It is way too comfortable to be in a cushy job then risk the unknown.Hope my point is clear